Creating and Sustaining Competitive Advantages

Gregory G. Dess

G. T. Lumpkin

Marilyn L. Taylor

Types of Competitive Advantage and Sustainability

•         Three generic strategies to overcome the five forces and achieve competitive advantage

•         Overall cost leadership

n  Low-cost-position relative to a firm’s peers

n  Manage relationships throughout the entire value chain

•         Differentiation

n  Create products and/or services that are unique and valued

n  Non-price attributes for which customers will pay a premium

•         Focus strategy

n  Narrow product lines, buyer segments, or targeted geographic markets

n  Attain advantages either through differentiation or cost leadership

Overall Cost Leadership

•         Integrated tactics

•         Aggressive construction of efficient-scale facilities

•         Vigorous pursuit of cost reductions from experience

•         Tight cost and overhead control

•         Avoidance of marginal customer accounts

•         Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising

•         A firm following an overall cost leadership position

•         Must attain parity on the basis of differentiation relative to competitors

•         Parity on the basis of differentiation

•         Permits a cost leader to translate cost advantages directly into higher profits than competitors

•         Allows firm to earn above-average profits

Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces

•         An overall low-cost position

•         Protects a firm against rivalry from competitors

•         Protects a firm against powerful buyers

•         Provides more flexibility to cope with demands from powerful suppliers for input cost increases

•         Provides substantial entry barriers from economies of scale and cost advantages

•         Puts the firm in a favorable position with respect to substitute products

Pitfalls of Overall Cost Leadership Strategies

•         Too much focus on one or a few value-chain activities

•         All rivals share a common input or raw material

•         The strategy is initiated too easily

•         A lack of parity on differentiation

•         Erosion of cost advantages when the pricing information available to customers increases

Differentiation

•         Differentiation can take many forms

•         Prestige or brand image

•         Technology

•         Innovation

•         Features

•         Customer service

•         Dealer network

Differentiation

•         Firms may differentiate along several dimensions at once

•         Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique

•         Successful differentiation requires integration with all parts of a firm’s value chain

•         An important aspect of differentiation is speed or quick response

Differentiation: Improving Competitive Position vis-à-vis the Five Forces

•         Differentiation

•         Creates higher entry barriers due to customer loyalty

•         Provides higher margins that enable the firm to deal with supplier power

•         Reduces buyer power because buyers lack suitable alternative

•         Reduces supplier power due to prestige associated with supplying to highly differentiated products

•         Establishes customer loyalty and hence less threat from substitutes

Potential Pitfalls of Differentiation Strategies

•         Uniqueness that is not valuable

•         Too much differentiation

•         Too high a price premium

•         Differentiation that is easily imitated

•         Dilution of brand identification through product-line extensions

•         Perceptions of differentiation may vary between buyers and sellers

Erosion of Product and Service Differentiation

•         Personal computers                 Servers

•         Hotel rooms                            Car rentals

•         Legal services                          Credit

•         Police cars                               Generic drugs

•         Ocean shipping                       Insurance

•         Bandwidth                              Pharmacy services

•         Network hosting                     Data storage capacity

•         Manufacturing capacity          Multibillion-dollar infrastructure projects

Focus

•         Focus is based on the choice of a narrow competitive scope within an industry

•         Firm selects a segment or group of segments (niche) and tailors its strategy to serve them

•         Firm achieves competitive advantages by dedicating itself to these segments exclusively

•         Two variants

•         Cost focus

•         Differentiation focus

Focus: Improving Competitive Position vis-à-vis the Five Forces

•         Focus

•         Creates barriers of either cost leadership or differentiation, or both

•         Also focus is used to select niches that are least vulnerable to substitutes or where competitors are weakest

Pitfalls of Focus Strategies

•         Erosion of cost advantages within the narrow segment

•         Focused products and services still subject to competition from new entrants and from imitation

•         Focusers can become too focused to satisfy buyer needs

Combination Strategies: Integrating Overall Low Cost and Differentiation

•         Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy

•         Goal of combination strategy is to provide unique value in an efficient manner

Three Combination Approaches

•         Automated and flexible manufacturing systems

•         Exploiting the profit pool concept for competitive advantage

•         Coordinating the “extended” value chain by way of information technology

Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces

•         Firms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches

•         High entry barriers

•         Bargaining power over suppliers

•         Reduces power of buyers (fewer competitors)

•         Value position reduces threat from substitute products

•         Reduces the possibility of head-to-head rivalry

Pitfalls of Combination Strategies

•         Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

•         Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain

•         Miscalculating sources of revenue and profit pools in the firm’s industry

Industry Life-Cycle States: Strategic Implications

•         Life cycle of an industry

•         Introduction

•         Growth

•         Maturity

•         Decline

•         Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle

Strategies in the Introduction Stage

•         Products are unfamiliar to consumers

•         Market segments not well defined

•         Product features not clearly specified

•         Competition tends to be limited

Strategies in the Growth Stage

•         Characterized by strong increases in sales

•         Attractive to potential competitors

•         Primary key to success is to build consumer preferences for specific brands

Strategies in the Maturity Stage

•         Aggregate industry demand slows

•         Market becomes saturated, few new adopters

•         Direct competition becomes predominant

•         Marginal competitors begin to exit

Strategies in the Decline Stage

•         Industry sales and profits begin to fall

•         Strategic options become dependent on the actions of rivals

Turnaround Strategies in the Life Cycle

•         Asset and cost surgery

•         Selective product and market pruning

•         Piecemeal productivity improvements